Rotterdam Brown Bag Seminars General Economics

Annette Pelkmans (Erasmus University Rotterdam)
Wednesday, March 23, 2016

The weak performance of the Philippine manufacturing sector has largely been blamed for the scarcity of employment, especially among the low-skilled.  This, in turn results to the persistence of poverty at around 25-26 percent of the population under the poverty line, despite the country’s strong growth performance in recent years. The Philippines’ rich and novel firm-level data covering the universe of trade transactions from 1991-2012, provides a unique opportunity to study the dynamics of a manufacturing sector under stress.  Firm demographics analysis, for instance, show a sharp and steady decline of the rates of new entrants, from 26% of all firms in 1991 to just 2% in 2012, as well as a fall in the survival rates of these new firms, from 79% to 24% in the period of 1992-2011.   To trace the position of Filipino firms in global production networks, firms are clustered and selected based on the high incidence of overlapping export and import transactions as well as firm size proxied by export revenues.  The growth in revenues, volume and unit values of each exported product of Filipino firms in global production networks are then compared to the growth of the bundle of imports sourced from their key country partners.  Benchmarked to the performance of neighbouring partners, which are most similar to the Philippines in terms of comparative advantages, we find that the growth of the export products’ unit values are on average lower than the country’s best performing neighbour. In as much as these changes in unit values are able to proxy the country’s ability to move up the quality ladder, our results evidence to the risks of a so-called middle-income trap for the Philippines.  Like in many middle income countries, which built their competitive advantage based on high-volume and cheap-labour intensive exports, rising labour costs will eventually lead to the exit of firms unable to capture new market niches based on increasing process and product innovation.  Logistic analysis of the determinants of firm upgrading further reveal that size, product specialization, import quality (proxied by unit values), exchange rates are key driving forces, with the 1998 Asian and 2009 Global financial crisis  exerting the strongest impact on the likelihood to upgrade.